Will Dodd-Frank survive the US election?

Not until one of this year’s US
presidential candidates reaches the necessary 270 votes in the electoral
college, will Wall Street, and the rest of the world, know the probable fate of
the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Not until one of this year’s US
presidential candidates reaches the necessary 270 votes in the electoral
college, will Wall Street, and the rest of the world, know the probable fate of
the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Throughout one of the longest and most
contentious US presidential campaigns on record, Republican presidential
candidate and former Massachusetts governor Mitt Romney pledged to repeal the
landmark financial reform bill along with other major legislation like The
Affordable Healthcare Act, better known as Obamacare.

With all the major opinion polls results
citing a neck-and-neck race, the only certainty is that it will be a close one,
according to Nicholas Colas, chief market strategist with financial technology
firm and agency brokerage ConvergEx. “Only the most partisan of observers seem
to feel differently,” he says.

If President Obama manages to be re-elected
while the Democrats maintain their majority in the US Senate and Republicans
keep majority in the US House of Representatives, the chance of the regulatory
status quo is likely, according to Paul Rowady, a senior analyst with industry
research firm TABB Group.

However if Romney wins and the Republicans
maintain control of half the legislative branch, they may find that the
regulatory train has left the station and it is too late to call back, he adds.

Since Dodd-Frank became law in July 2010,
US financial regulators have finalised approximately a third of act’s required
398 rules, proposed another third of the rules that need to be finalised and
have yet to propose the remaining third as of the end of October, according to
the latest Dodd-Frank Progress Report compiled by legal firm Davis Polk.

“The industry is spending considerable
resources to prepare for the new rules and adjusting its behaviour, systems and
infrastructures,” says Rowady. “You would upset as many people by rolling
Dodd-Frank back as you would please going forward.”

Securities Industry and Financial Markets
Association (SIFMA) president and CEO Tim Ryan expressed similar thoughts
during the industry organisation’s annual meeting on October 23. “We have been
upfront in objecting to provisions that we believe are, at best, extraneous and
unrelated to the financial crisis, such as the Volcker Rule,” he says. “But, we
have never supported a complete repeal of Dodd-Frank, and do not support repeal
now.”

Even if the next administration could
repeal Dodd-Frank, it could not return the US markets to their pre-Dodd-Frank
structure according to Rowady.“This is a global market that is undergoing a
global transformation of which Dodd-Frank is just one piece,” he explains.

Returning the markets to such a state would
eliminate or neuter other major market reforms taking place outside the US like
the EU’s Markets in Financial Instruments Directive (MiFID) and European market
infrastructure regulation (EMIR) as well as the global Basel III standard.

Both Dodd-Frank and Emir and in part
responses to demands by the Group of 20 for reduced systemic risk in the OTC
derivatives markets by end-2012, a deadline that Mark Carney, head of the
Financial Stability Board, yesterday admitted was beyond regulators at a G-20
summit in Mexico.

Reform,
not abandon

Although the Dodd-Frank is likely not to
disappear with the swearing in of the 113th Congress in January 2013, many in
the industry want to fix what they perceive as the act’s structural weaknesses.

The current model contains unrealistic
deadlines that encourage flawed rule making, according to SIFMA’s Ryan.
“Decisions that need to be made in a logical order are being made
simultaneously or in the wrong order,” he observed recently.

As of the end of October, the US Commodity
Futures Trading Commission (CFTC) finalised 35 rules for Title VII of
Dodd-Frank regarding the OTC swaps market, while it missed deadlines for four
proposed rules and four deadlines for another four rule, which still need to be
proposed.

The US Securities and Exchange Commission
(SEC) fared worse, finalising 10 rules while missing deadlines for 17 proposed
rules and deadlines for two rules waiting to be proposed.

The existing rules cover many of the
important issues, Ryan has acknowledged, but a number of provisions dealing
with non-bank systemically important financial institutions, orderly
liquidations and the extra-territorial nature of major Dodd-Frank rules remain
unresolved. His verdict? “The model currently is not working.”

One suggestion put forward by SIFMA to
address the shortcoming is to have the Department of Treasury’s Financial
Stability Oversight Council, which is mandated to identify risks and respond to
emerging threats to financial stability, step up and provide comprehensive
coordination of the remaining Dodd-Frank rule making.

“The FSOC must agree that radical
intervention is necessary and establish priorities reflecting the overall
objective of Dodd-Frank: sharply reducing systemic risk so that 2008 can never
happen again and investors and savers can operate without fear of a breakdown
in our markets,” said Ryan.

Sore
losers

Before market participants worry about how
the next administration will handle financial regulation, ConvergEx’s Colas
wonders how the current administration on Congress will address the 2011 Budget
Control Act’s looming sequestration, or ‘financial cliff’.

“Numerous studies of the impact total 2-4
points of growth in gross domestic product should the entire cliff come into
law,” says Colas. “Since that measure of economic growth is only currently running
2% or so, failing to address the cliff all but assures a recession in early
2013.”

How likely is it for Congress and the
President to go over the cliff?

Colas turns to the ‘Five Stages of Grief’,
developed by psychiatrist Elizabeth Kubler-Ross, to estimate how the party that
loses the election may act during the lame-duck session.

“The good news is ‘acceptance’ is the final
step – the person (or party) that suffers a loss almost always learns to cope
with it over time,” he says. “The bad news is that there are four antecedent
emotions, which are denial, anger, bargaining and depression – in that order.
The first two steps seem especially ill-suited for a quick political compromise
on the fiscal cliff.”